Expanding the Four Corners.
Refining and, some would say, "rewriting" the rules of construction was a focal point in 2015. The court in In re Deepwater Horizon (1) allowed the carrier to use limitations in an indemnity clause in a separate drilling contract to limit additional insured coverage (2). The court found that the insurance policy incorporated the drilling contract based on the AI policy requirement of "a written contract."
Tying the indemnity clause limitations to the AI coverage presented a more vexing task. The drilling contract required BP to be an AI, "except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this contract." The court held that the plain language of this clause set out two separate requirements, not a single one tied only to workers' compensation. Thus, the court avoided deciding whether the rules of construction are different for a "sophisticated insured" and whether contra proferentem applies to the incorporated contract (3). Also unanswered is whether an incorporated contract can be used not only to limit but also to broaden coverage. Scriveners will be working overtime to consider what else can be done under Deepwater to limit AI coverage, such as cutting short the limits of coverage to an amount different from that set forth in the policies.
Anachronistic Terms Must Be Interpreted in Light of Modern Practice and Made Uniform for Standardized Policies.
In McGinnes Indust. Maint. Corp. v. Phoenix Ins. Co. (4), the policy required a defense of a "suit." No suit was brought, but Environmental Protection Agency potentially responsible party letters and/or a unilateral administrative order had been received. The initial letter included a long list of requested information, much like a subpoena. In a 5-4 decision written by Texas Supreme Court Chief Justice Nathan L. Hecht, the court held that "suit" at the time the policies were issued literally meant legal proceedings in a court, but in modern practice, administrative proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act have replaced legal actions. Therefore, a CERCLA PRP letter and related proceedings sufficed, and a complaint or petition in a court was not required.
The McGinnes court held that standardized policy terms should be interpreted in a way that achieves uniformity with the decisions in other jurisdict ions, noting its decision was consistent with the decisions of the highest courts in seven states. Justice Jeff Boyd's dissent characterized this as the "everybody's doing it" rule, pointing out that there was in fact little uniformity and that the court had previously criticized the uniformity approach in U.S. Fid. and Guar. Co. v. Goudeau. (5).
Cleanup Costs Are "Damages."
The McGinnes court expressly held that cleanup costs are "damages" covered under a commercial general liability policy, reasoning that any other interpretation of "suit" would lead to the policy providing indemnity but no defense, which would leave the insured in charge of defense without an incentive to fully defend.
At issue in Yorkshire Ins. Co., Ltd. v. Seger (6) is whether the "fully adversarial trial" rule of State Farm Fire and Cas. Co. v. Gandy (7) applies where the carrier has wrongfully refused to defend and the insured is too poor to provide a defense. The court will have to reconcile Gandy with Evanston Ins. Co. v. ATOFINA Petro., Inc. (8), which held that a breaching carrier may not challenge the reasonableness of the amount of a settlement between the insured and the claimant.